THE WAY TO GET SA BACK ON TRACK

Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel
Switzerland
baselcommittee@bis.org

Cc: SARB-banksup@resbank.co.za

Re: Discussion paper: Regulatory Treatment of Sovereign Exposures

We thank you for the opportunity to provide comment on the Basel Committee on Banking Supervision (BCBS) discussion paper that looks at the treatment of exposures to Sovereigns.
We believe the discussion paper is a good summary of the sources and channels of sovereign risk in the banking system, the holistic role of sovereign exposures and the existing regulatory treatment of sovereign exposures. As such, any revising of the existing regulatory treatment entails a risk of having unintended consequences and it is recommended that an impact assessment is conducted prior to making any changes.
We note that the Committee recognises that the specific roles of sovereign exposures may vary across jurisdictions due to the heterogeneity in banks’ business models, market structures and macro-financial balances.

In general:

We are supportive of the differentiation between central banks, central government and other sovereign exposures and encourage the Committee to provide examples of subnational and public sector entities that satisfy the risk equivalence criterion for consideration as central government

We do support the use of external ratings, but would recommend the introduction of a Standardised Credit Risk Assessment Approach (i.e. in line with the Bank asset class under the revised Standardised Approach contained in “Basel III: Finalising post-crisis reforms”). This would accommodate jurisdictions that do not allow the use of external ratings as well as subnational government and public sector exposures that are not externally rated. In terms of the granularity of the risk weight table, increased granularity could be accommodated when using external ratings. For a Standardised Credit Assessment Approach the granularity will have to be limited to avoid undue complexity.

We would recommend that Sovereign bonds held for HQLA purposes should be subject to a 0% risk weight and be exempt from concentration risk assessment

We do support risk weights that differentiate by at least: external rating agency ratings, local vs. foreign currency – where this may not be reflected in separate rating agency ratings, and entity type. We do prefer a more granular set, closer to that included in table 4.

We acknowledge that the low default nature of sovereign exposures makes it difficult to model risk parameters (i.e. PDs and LGDs), but consider the removal of the Internal Ratings Based Approach in its entirety as unnecessary. The models employed by banks are equivalent to those employed by Rating Agencies in their rank ordering of sovereign entities. The issue lies with the calibration of the risk parameters and as such we wish to recommend the introduction of PD and LGD floors and/or ranges as means of ensuring appropriate capitalisation for the credit risk.

Asset classification as set out in the document needs to be clarified in a “developing economy scenario” as:

We are not sure that the distinction between central bank and central Government is clear enough or if even necessary?

We would not recommend a distinction between central banks that target exchange rate stability vs. where this is not the case.

We do agree that there is a difference between local and foreign currency assets to central banks.